Global Real Interest Rates – Charts Updated 27/5/11

An update of the global real interest rate charts for May 2011. Global real interest rates continue to look perilously bearish.

 

[EDIT: For the updated versions of the following charts, see here.]

 

Long-term & Short-term Real Fed Funds Rate:

 

I often say here on greshams-law.com that money is to profit-seeking individuals as the sea is to fish. Meaning, as money trades on one side of every transaction in an economy, monetary trends tend to affect most businessmen and profit-seekers. Generally speaking, an increasing supply of money is favorable for business conditions and a contracting supply of money is negative for business conditions. Since the fractional-reserve banking system produces of the bulk of the ‘money supply’ (that is, ‘IOU money’ – to quote Bob Prechter), it is important to keep a close eye on the tendencies therein.

 

When the real fed funds rate is strongly and consistently positive, the fractional-reserve banking system has a platform to expand on a continuous basis. Such expansionary trends can have strong momentum and can produce very favorable business conditions. Conversely, when the real fed funds rate is strongly negative or only intermittently positive, the previous expansion tends to reverse and generally unfavorable business conditions are produced. As can be seen from the chart below, there have been three major periods where the real fed funds rate has been negative (or at least, not positive). During these periods, the fractional-reserve banking system has tended to stagnate or contract. As can be seen on the chart below, we are in one of these periods.

 

Long Term Real Fed Funds Rate Chart

Click to enlarge. Source: St Louis Fed

 

On the shorter timeframe, the real fed funds rate is strongly negative and is pointed down.

 

US Real Fed Funds Rate Graph

Click to enlarge. Source: St Louis Fed.

 

Developed Countries:

 

As can be seen from the charts below, in fact most of the developed world is experiencing a strong downward trend in their respective real interest rates. Most of these economies are ‘credit-addicted economies’ (to quote Marc Faber), therefore such trends can be seen as bearish for asset prices.


US Real Interest Rate Chart

US - Click to enlarge. Source: OECD Statistics

Euro Area Real Interest Rate Chart

Euro Area - Click to enlarge. Source: OECD Statistics

Japan Real Interest Rate Chart

Japan - Click to enlarge. Source: OECD Statistics

UK Real Interest Rate Chart

UK - Click to enlarge. Source: OECD Statistics

Switzerland Real Interest Rate Chart

Switzerland - Click to enlarge. Source: OECD Statistics

Canada Real Interest Rate Chart

Canada - Click to enlarge. Source: OECD Statistics

Australia Real Interest Rate Chart

Australia - Click to enlarge. Source: OECD Statistics & Reserve Bank of Australia

New Zealand Real Interest Rate Chart

New Zealand - Click to enlarge. Source: OECD Statistics & stats.govt.nz

Norway Real Interest Rate Chart

Norway - Click to enlarge. Source: OECD Statistics

 

Asia:

 

Likewise, Asia’s real interest rates display strong downtrends. Asian currencies are – of course – highly dependent on the dollar (that is, Asian central banks own dollars), so it is unsurprising that their real rates are moving in sync with the real fed funds rate. In fact, the dollar reserve standard implies that the twists and turns in the dollar are magnified in Asia – this is confirmed by the poor performance of Asian equities of late.

 

China Real Interest Rate Chart

China - Click to enlarge. Source: OECD Statistics

India Real Interest Rate Chart

India - Click to enlarge. Source: OECD Statistics

Indonesia Real Interest Rate Chart

Indonesia - Click to enlarge. Source: OECD Statistics

Korea Real Interest Rate Chart

Korea - Click to enlarge. Source: OECD Statistics

 

Eastern Europe:

 

With the exception of Russia, real interest rates in Eastern Europe are somewhat more positive. This region may outperform the other Emerging Markets.

 

Czech Republic Real Interest Rate Chart

Czech Republic - Click to enlarge. Source: OECD Statistics

Hungary Real Interest Rate Chart

Hungary - Click to enlarge. Source: OECD Statistics

Poland Real Interest Rate Chart

Poland - Click to enlarge. Source: OECD Statistics

Russian Federation Real Interest Rate Chart

Russian Federation - Click to enlarge. Source: OECD Statistics

 

Latin America:

 

Likewise, Latin American real rates look less perilous:

 

Brazil Real Interest Rate Chart

Brazil - Click to enlarge. Source: OECD Statistics

Chile Real Interest Rate Chart

Chile - Click to enlarge. Source: OECD Statistics

Mexico Real Interest Rate Chart

Mexico - Click to enlarge. Source: OECD Statistics

 

Middle East & Africa:

 

Real rates in Israel, Turkey & South Africa all display bearish dynamics. The companies and institutions that are dependent on the existing mass of ‘IOU money’ may struggle somewhat from here:

 

Israel Real Interest Rate Chart

Israel - Click to enlarge. Source: OECD Statistics

Turkey Real Interest Rate Chart

Turkey - Click to enlarge. Source: OECD Statistics

South Africa Real Interest Rate Chart

South Africa - Click to enlarge. Source: OECD Statistics

See here for our collection of rare historical economic data.

Posted May 27, 2011
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  • Willoughby

    Great graphs thank you.

    One question, how are you calculating the ‘real’ interest rate?

    • Willoughby

      I see now.

      • http://greshams-law.com Aftab Singh

        You’re welcome.

        In this case I’ve used:

        ‘Real’ Interest Rate = Interest Rate – (Year on Year Change in the Consumer Price Index)